Reserve Bank of India may hike key lending rate by 50 bps in Dec: SBI Research

"The current unscheduled meeting on 3 Nov’22 of the RBI Act is only a part of the regulatory obligation and we do not foresee any other agenda to be announced at this meeting, even as it is scheduled a day after the Fed meet on 2nd Nov’22," the SBI Research said in a report titled Ecowrap.

"The most recent reading of the US Employment Cost Index showed a considerable slowdown in private-sector wage growth in the third quarter - it rose 1.2% compared to 1.6% in the second quarter indicating that the wage-price spiral is beginning to ease.

"Consumer spending, which accounts for more than two-thirds of US economic activity, showed growth slowing to a 1.4% rate from the second quarter's 2.0%.

"New orders for non-defence capital goods, viewed as a proxy for business spending, fell unexpectedly in September. All this conjures up for a significantly lower probability of 75 bps hike for mid-December (65% probability), with the narrative for a 50 bps hike taking pole position now," the report authored by Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, said.

The report said the recent MPC minutes in India suggest some members looking for an early end to the rate hike cycle.

"The unseasonal rains in several parts of the country (in food grains producing states also) in October this year are affecting kharif crops significantly. In states like UP, the unseasonal rain was more than 400% above normal.

"In 2019, when unseasonal rains happened, average food prices more than doubled from 4.9% to 10.9% . Currently, the September food inflation is at 8.4% and a similar trend like the one seen in 2019 can put headline inflation towards 7.5% in December," the report pointed out and said this could put a spanner to the inflation projections of RBI and market consensus.

"This could also mean that the terminal repo rate could still be difficult to comprehend at this time, though consensus puts it at 6.5%," the report said.

The report said liquidity deficit in the banking system has been now consistently running at Rs 60,000 crore for the last 4 days and banks have adjusted deposit rates significantly upwards in October.

"If we look at the historical interest rate cycles, the increase in deposit rates lag the increase in lending rates. Also, given that 45% of bank deposits are CASA, it is only the 55% of term deposits that need adjustment and hence ideally, there will always be less than full adjustment of deposit rates to repo rates.

"In the current cycle, with a CASA ratio of 45%, a 190 basis point increase in repo rate could result in 105 basis point increase in deposit rate (190*55%). Any deposit rate increase beyond that will be an additional one. To put things in perspective, SBI has already raised its 1 year deposit rate by 100 basis points," it said.

The report said the good news, however, is that Indian rupee has continued its comparative resilience, strengthening on the back of recent fall in Dollar index.

"Even though the current Dollar descend could be a temporary phenomenon as markets love to side with somewhat illusory narratives before policy meets that inflation has peaked due to policy actions, the wild swings seen post select tech behemoths’ results point to markets pricing in more the weaker forward guidance over the better than expected immediate results," the report said.